Financial Projections

Definition:Estimates of the future financial performance of a business

Planning out and working on your company's financial projections
each year could be one of the most important things you do for your
business. The results--the formal projections--are often less
important than the process itself. If nothing else, strategic
planning allows you to "come up for air" from the daily problems of
running the company, take stock of where your company is, and
establish a clear course to follow.

Regular planning also helps your company deal with change, both
inside and outside the company. By constantly reevaluating your
company's strengths, markets and competition, you're better able to
recognize problems and opportunities. You can react to new
developments, rather than simply plugging along.

But what keeps it from just being a number-crunching exercise?
Here are three good reasons to project your financials:

First, the financial plan translates your company's goals
into specific targets. It clearly defines what a successfully
outcome entails. The plan isn't merely a prediction; it implies a
commitment to making the targeted results happen and establishes
milestones for gauging progress.

Second, the plan provides you with a vital
feedback-and-control tool. Variances from projections provide
early warning of problems. And when variances occur, the plan can
provide a framework for determining the financial impact and the
effects of various corrective actions.

Third, the plan can anticipate problems. If rapid growth
creates a cash shortage due to investment in receivables and
inventory, the forecast should show this. If next year's
projections depend on certain milestones this year, the assumptions
should spell this out.

Depending on your company's situation and objectives, you'll
need to develop several types of projections and budgets:

A model that projects either the current year or a rolling
12-month period by month. This type of forecast should be
updated at least monthly and become the main planning and
monitoring vehicle. Information in this model can be the
springboard for preparing the other types of plans discussed
below.

A long-range, strategic plan looking out three to five
years. While the 12-month forecast often reflects short-term
expectation and tactical plans, the long-range projection
incorporates the strategic goals of the company. For startup
companies, the initial business plan should include a
month-by-month projection for the first year, followed by annual
projections going out a minimum of three years. Some investors may
prefer to see the second year broken out by quarters. It's fine to
append the projections for years two and beyond to the 12-month
forecast, but the numbers should be more than just a simple
extrapolation of the current year. A strategic planning process
should accompany development of the "out year" projections.

Budgets, typically covering one year. Budgets translate
goals into detailed actions and interim targets. Budgets should
provide details, such as specific staffing plans and line-item
expenditures. Given the detail required, the size of a company may
determine whether the same model used to prepare the 12-month
forecast can be appropriate for budgeting. In any case, unlike the
12-month forecast, budgets should generally be frozen at the time
they are approved. They should also be consistent with the goals of
the long-range plan.

Cash forecasts. These break down the budget and 12-month
forecast into even further detail. The focus is on cash flow,
rather than accounting profit, and periods may be as short as a
week in order to capture fluctuations within a month.

All projections should be broken out by months for at least one
year. If you choose to include additional years, they generally do
not need to be any more detailed than by quarters for another year
and then annually after that.

The projections should include an income statement and a balance
sheet. Expenses can be summarized by department or major expense
category; you can hold line-item detail for the budget. Cash needs
should be clearly identified, possibly by adding a separate
statement of cash flows. If your financial statements usually
report financial rations or expenses as a percent of sales,
calculate and report these as part of the projections, too.